Exchange Rates Adjust Amid Trade Turmoil

The most impressive exchange rates changes this year have been the devaluations relative to the U.S. dollar (USD) of the Argentinian Peso and the Brazilian Real. The Argentinian Peso has lost 24% of its value since the first of the year on a monthly basis, and the Brazilian Real is 13% below January’s. Argentina’s currency devalued 51% in May compared to May 2017, while Brazilian Real was 13% weaker relative to the USD. These weaker currency values make Argentinian and Brazilian more competitive on the trade front. It’s considered a headwind to U.S. grain exports for corn and soybeans. However, with the crop problems in South America, the U.S. should still have no trouble grabbing market share in the near term.

This isn’t what is grabbing headlines recently though. Mexico, one of the largest destinations for U.S. Agricultural products has lost 13% since the strongest week of 2018. The large drop can be attributed to the recent headlines regarding the U.S. placement of tariffs on steel and aluminum imports from countries that were previously given an exemption. In the wake of facing a 25% tariff increase, Mexico retaliated by putting a number of U.S. products under new tariff restrictions. The Mexican Peso in the last week has lost 0.85 to USD and has continued to devalue. This trend has sped up recently, but the Mexican Peso has been moving lower since April 2018. However, it’s important to recognize that day to day or even week to week changes in currency values are too short-term compared to the global factors that shape them. Longer term, exchange rates are determined by macroeconomic forces and by sectors much bigger than the agriculture and food trade sphere.

Over that same week that the Peso lost 0.85, the Japanese Yen lost 1.62, the Argentinian Peso lost 0.89, and the South Korean Won appreciated 4.00. The U.S. is in a favorable macro environment, supporting the U.S. dollar. GDP estimates released the last week of April indicated the US grew at 2.9% in real GDP and this week the Fed raised rates and shifted policy away from financial crisis recovery. U.S. inflation rates have picked-up, and the U.S. has entered its 10th straight year of solid economic growth. In contrast to the U.S., economic growth in many other countries is now slowing.